(Updated 28 Dec’12) Tax payers were overjoyed when our Finance Minister, in his budget speech of 2012, announced a new avenue to save tax – by investing in direct equity. The announcement was ambiguous and lacking in detail. Hence, everyone new that they could save tax by investing in stock market but no one knew the modalities and restrictions.

Then in Sep 2012, Finance Ministry issued a detailed note outlining the features and clauses of the scheme. In this post, I’ll make an effort to explain it in layman’s language bereft of any jargon.

The scheme is named as ‘Rajiv Gandhi Equity Savings Scheme‘ (don’t understand why everything in this country gets named after the Nehru-Gandhi family :x). The objective of this scheme is to divert people’s savings into equity markets and promote equity culture generally among small investors.

This scheme comes under section 80CCG of Income Tax Act 1961.

If you don’t have time to read the full post, following is an explanation of this scheme in 4 lines:

Under ‘Rajiv Gandhi Equity Savings Scheme’ – a new equity investor will be able to claim 50% of his investment in direct equity as deduction subject to maximum investment of Rs. 50,000 and provided his taxable income is below Rs. 10 lacs. The investment will be subject to 3 years lock-in.

Key features of Rajiv Gandhi Equity Savings Scheme (RGESS)

The scheme is open to new equity investors only. They will be identified on the basis of their PAN numbers. If you already have a demat account but you have never made an transaction in it (equity/derivative) before the date of notification of this scheme then you are eligible for deduction under this scheme. Also, if you are a second holder in a demat account but don’t have any account in your name, you can open one to claim deduction under RGESS. (Which is the best demat account? check here)

Your taxable income should be less than or equal to Rs. 10,00,000

You can invest a maximum of Rs. 50,000 and a deduction of only 50% will be allowed. Hence, the maximum deduction you can claim in a year is Rs. 25000 (something is better than nothing :))

You can invest in:

Stocks listed under the BSE 100 or CNX 100

PSUs which are Navratnas, Maharatnas and Miniratnas

Follow-on Public Offers (FPOs) of the above companies

IPOs of PSUs, which are getting listed in the relevant financial year and whose annual turnover is not less than Rs. 4000 cr for each of the immediate past three years

Mutual Funds and Exchange Traded Funds that have above stocks as their underlying investments and are transacted through demat account.(If anyone has compiled a list of stocks eligible under this scheme, please share)

You need not invest the full amount in one-go. You can do it in smaller chuncks as per your convenience.

Lock-in period is 3 years. Out of which, the first year is blanket lock-in.

After the first year, you can start trading the stocks that you have bought under this scheme. However, care should be taken that you maintain the amount of investment that you have claimed at any point of time. That means, if you have claimed deduction on 50k investment, the total value of shares in your account should not fall below 50k at any point of time in these two years. Basic principle being that whatever amount of stocks you sell, equal amount of stocks should be bought by you.

Valuation of shares will be on the basis of closing price of previous day.

In case you break any of the rules stated above, the tax benefit will be withdrawn.

I think Rajiv Gandhi Equity Savings Scheme is a good option to save additional 25k in taxes. However, not everyone would be able to benefit from it. So if you are an existing equity investor (like me), you will not get any benefit from this scheme :(. However, there are other ways to save taxes which I have explained here.

Update 8 Dec 2012: SEBI in its circular dated 6 Dec 2012 has asked stock exchanges to list stocks, mutual funds and ETFs that qualify under RGESS on their website.

I hope this article would have answered a lot of your queries about RGESS. If there is anything which has not been answered here, please do let me know in comments below and I’ll try my best to answer the same. You may also add if I have missed any point.

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Is this within the 1Lac tax saving bracket or in addition to that?
Also one more thing… you mentioned “you can save 25K”
But, I believe this 25 K will be applicable for “deduction” from net income and if one falls in 20% bracket (which is the max limit) so, one can save 5K… isn’t it??

hi naimisha
thanks a lot for adding to my knowledge , and my qus. is tat I ahave invested in ELSS direcly for last 3 years BUT i dont have dmat acc. am I eligible for RGESS
thanks { taxfree } in advance ,

I have a question. I already have a Demat account, but I just purchased some IPO’s 3 years back and after that I did not transact from my Demat Account. At present even, I dont know abott the status of my Demat account. So will I be eligible for this scheme.

My demat A/c is not operated since it was opened , can invest to get tax benefit under this section? Since equity is purchased on market price,how and which amount is considered for 50% tax benefit? Hoe to show the amount so invested in tax return?

I had opened a NON TRADING DEMAT account only in my name with Sharekhan, only to convert my very old shares in physical form and subsequently transfer all those to the Dmat TRADING Account in the joint name of my wife and myself, with my wife’s as the FIRST. Most of the electronically converted shares have now been sold out and we never purchased any shares thru this trading account till this day.

After transferring the shares to our joint trading account , the non trading account in my name was closed without any further transaction.

I will be happy if you can clarify whether I will now be eligible to open a trading account in my name and invest in Rajiv Gandhi Scheme to qualify for tax deduction.

This is a complicated case open to interpretations. From what you’ve said, my understanding is as follows: Old physical shares were in your wife’s name and they were converted to demat form and sold off.

In such a scenario, your wife will not be eligible for deduction under this clause. However, you will be eligible

No madam. Some old physical shares were in my single name. I had to open a non trading account with sharekhan to convert to electronic form.
After conversion those shares were transferred to our Joint Trading account(with my wife as the first name) and sold.

My non trading account was closed

Most our shares have now been sold out. We never bought nor intend to buy shares

The whole exercise was to dispose of all our old shares( around 15 -20 years old), as we both are senior citizens.

I am a tax payer now and want to reduce my tax liability by investing in Rajiv gandhi scheme. Is it possible.

I understand that part. What I’m saying is that When someone else said they had already bought ELSS for 3 years but didn’t have a DEMAT account, you replied that they would qualify for RGESS.
When I said that I invested in ELSS and normal mutual funds but don’t have a DEMAT account, you said I’m not eligible for RGESS.
So the difference between the two cases is my investment in non-ELSS mutual funds. IS this investment making me ineligible for RGESS? That is my question.

Normal ELSS mutual funds do not qualify for deduction under 80CCG. For availing deduction under 80CCG you need to invest either in stocks directly (for which you need a demat account) or invest in mutual funds launched specifically for 80CCG (for which demat account is not required).

I’m sorry for not making myself clear earlier. Now I understand the confusion.
I wasn’t asking if my existing mutual fund purchases will get me the RGESS benefits. I was asking if I am eligible to invest under RGESS (since people who have already invested directly in IPO’s or other stocks cannot claim the deduction even if they invest in specified stocks/funds).
If my existing ELSS purchases and normal mutual fund investments make me ineligible for RGESS benefits, I would invest in them. But if I can get the benefits of RGESS, I will open a DEMAT account and invest in the appropriate stocks/mutual funds.

Sorry, a small typo in the above message.
If my existing ELSS purchases and normal mutual fund investments make me ineligible for RGESS benefits, I would “NOT” invest in them. But if I can get the benefits of RGESS, I will open a DEMAT account and invest in the appropriate stocks/mutual funds.

If I understand correctly, you have invested in normal mutual funds and ELSS funds. In such scenario, you can go ahead and invest in RGESS securities (Demat route or mutual fund route) and take advantage of the deduction available

I already have DMAT a/c from past 5 yrs so I cannot take benefit of RGESS, however as you have mentioned in your earlier post that I can claim benefit if I open a DMAT a/c on my wife’s name and have some RGESS on her name, is this correct? Please elaborate.

Even if she is a salaried? (less than 2 lac annual) and hence doesn’t file returns.